University of Oulu

The value of relationship banking : empirical evidence on small business financing in Finnish credit markets

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Author: Peltoniemi, Janne1
Organizations: 1University of Oulu, Faculty of Economics and Business Administration, Department of Accounting and Finance
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1 MB)
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Language: English
Published: 2004
Publish Date: 2004-11-16
Thesis type: Doctoral Dissertation
Defence Note: Academic Dissertation to be presented with the assent of the Faculty of Economics and Business Administration, University of Oulu, for public discussion in Auditorium TA 105, Linnanmaa, on November 26th, 2004, at 12 noon.
Reviewer: Professor Hannu Schadéwitz
Professor Jonathan A. Scott


The role of relationship banking has been the subject of intensive discussion in recent years. A large body of the literature has examined the benefits and costs related to lender-borrower relationships in small business finance. Despite the numerous studies conducted in both market-based and bank-based economies, the specific sources of the determinants of the value of relationship lending are ambiguous. However, many research results imply that a close and long-term relationship with the bank is desirable for small businesses.

In this study, we investigate the sources of value in Finnish lender-borrower relationships in small business finance. We conduct three separate empirical studies that cover the following aspects of relationship banking: determinants of the value of the bank-firm relationship, collateral requirements and borrower risk, and the comparison of the different characteristics of relationship banking in bank financing and non-bank financing. We use unique and detailed credit file data from two sources, bank data from one of the largest banks in Finland and non-bank data from a large financial institution owned by the Finnish state. Both datasets cover the period 1995 to 2001.

Our main findings are the following. First, duration and scope are important characteristics in determining the sources of value in the bank-firm relationship. We find that a longer relationship tends to lower the cost of the credit, and that wider scope tends to decrease the collateral requirements significantly. Second, a long-lasting bank-firm relationship is beneficial, especially to high-risk firms. As the relationship matures, loan premiums for high-risk firms decrease at a higher rate than for low-risk firms. Third, low-risk borrowers put up more collateral than high-risk borrowers, which implies the existence of a signaling effect. According to the signaling theory, low-risk firms are willing to pledge more collateral than high-risk firms. Fourth, when comparing bank and non-bank credit files, we find that bank-firm characteristics are not fully transferable to the relationship between a non-bank and a firm.

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Series: Acta Universitatis Ouluensis. G, Oeconomica
ISSN-E: 1796-2269
ISBN: 951-42-7571-3
ISBN Print: 951-42-7570-5
Issue: 15
Copyright information: © University of Oulu, 2004. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.